- Rick Rieder sees bond market volatility as an opportunity amid economic policy shifts.
- He said short-duration Treasurys offer attractive yields as rate-cut expectations adjust.
- European high-yield bonds are also appealing due to lower volatility and favorable currency swaps.
It’s been a particularly busy start to the year for BlackRock’s bond chief Rick Rieder — not that someone overseeing $3 trillion in assets has all that much spare time to begin with.
The economic policy uncertainty that President Donald Trump has introduced has sent the bond market flailing in a way Rieder hasn’t seen before. But the volatility isn’t necessarily a bad thing.
“There is change afoot,” Rieder told BI. “One of the great things about investing in this environment is it’s not static.”
“The reaction function to any piece of news can be really extreme,” he continued. “So markets go through these periods of illiquidity, and it just presents these great opportunities that, by the way, may only be there for 10 minutes, or an hour, or a day. But I’ve never seen markets move to such extremes.”
Rieder shared a few of those opportunities he’s leaning into at the moment in his iShares Flexible Income Active ETF (BINC), which yields 6.6% and has grown to $9 billion in assets since launching in May 2023.
One of them is the front end of the yield curve, or short-duration Treasurys.
Yields on the 2-year note had fallen from 4.3% last year to 3.6% in April as investors started to price in as many as five rate cuts from the Federal Reserve. But as rate-cut expectations have fallen, yields have risen back close to 4%, making them more attractive.
Front-end bonds also offer a hedge for economic volatility in the short term, allowing investors to clip a robust coupon that they're not locked into for too long. The long end of the curve, meanwhile, isn't acting as a recession hedge right now, Rieder said, with investors worried about inflation from tariffs and rising yields thanks to ballooning fiscal spending deficits.
"I'd rather keep yield up and not have to worry about the volatility," Rieder said.
"The long end is not a hedge," he continued. "Its traditional offsetting risk function doesn't work today, and so until yields move significantly higher I don't see any significant reason to own longer in interest rates."
Long-end rates in Europe, however, are more attractive, Rieder said. He said he's betting on European B and BB-rated high-yield bonds to deliver higher yields. This is because economic growth is slowing to a greater degree in Europe than in the US, and inflation is more tame, so the European Central Bank is likely to cut rates more aggressively. This has meant limited upside volatility for European rates. For example, while 10-year Treasury yields have surged from 3.99% to 4.43% since April 4, 10-year Eurozone bond yields have been virtually flat, falling by just three basis points from 3.13% to 3.1%. When yields rise, bonds lose their value, and vice versa.
"Taking some of your interest-rate risk in Europe versus the US — particularly versus long US — has been an exciting thing to be involved with," Rieder said.
"Usually, US and European rates move together," he continued. "Now you're seeing historic movements of European rates relative to the US, meaning European rates are much more stable."
Plus, the dollar's weakness relative to the euro is icing on the cake.
"Because of the cross-currency swap, you could buy Europe and you get a couple of percent of additional yield," Rieder said.
To mitigate the downside risk of some of the higher-yield bonds in his portfolio, Rieder pairs them with high-quality assets like AAA collateralized loan obligations (CLOs), he said.